Colombia Monetary Policy

Colombia: Central Bank hikes rate less than expected to 0.25%

November 27, 2015

The members of the Central Bank (BanRep) Board decided to increase the reference interest rate by 25 basis points from 5.25% to 5.50% at the Bank’s 27 November monetary policy meeting. The decision surprised the markets, which had expected a stronger 0.50% increase. This is the third consecutive time the Central Bank has hiked the reference rate this year. The next policy meeting is scheduled for 30 December.

In its accompanying statement, BanRep reaffirmed that recent data pointed to weaker external demand than in 2014. Growth in the United States has been relatively strong, while the Eurozone is experiencing a modest recovery. In addition, the pace of China’s economy is continuing to slow and growth in Latin American countries remains subdued or even negative. BanRep highlighted that, “the probability of the FED increasing its benchmark interest rate in December rose and the long-term bond rates increased.”

Regarding the domestic economy, BanRep noted that the latest data point to better-than-expected growth in Q3, with retail sales suggesting dynamic domestic demand. However, net exports are expected to contribute negatively to growth. Nevertheless, supply side indicators such as industrial production and production of cement, suggest solid growth and the Bank expects GDP growth of around 4.0% in Q3. As a consequence, BanRep maintained its growth forecast for 2015 at 3.0%.

In terms of price developments, BanRep pointed out that inflation in October and the average of four different measures of core inflation exceeded its projections and remain above its target. In addition, various indicators signal that medium-term inflation expectations increased and are in the top range of the target or even above it. The main factors that are influencing these renewed inflationary pressures are nominal depreciation being passed to consumers, the increase in the cost of imported raw materials and a soft food supply. BanRep added that, “pass-through of part of the devaluation of the peso to consumer prices and a strong presence of El Niño have slowed down convergence of inflation to the target, due to its direct impact on prices and inflation expectations, as well as to the probable triggering of indexation mechanisms.”

Against this backdrop, the Bank decided to hike the reference rate for the third consecutive time. BanRep argued that, “inflation expectations have increased and the risk of a slowdown in domestic demand, beyond that which is consistent with the decline registered in national income, has moderated.”

Panelists participating in the LatinFocus Consensus Forecast see the policy rate ending 2015 at 4.42% and they expect it to end 2016 at 4.36%.

According to data released by Colombia’s National Administrative Department of Statistics (DANE) on 18 January, industrial production rebounded in November following three consecutive months of contractions.